Attention to Hydro

Need to incentivise private sector participation

The hydropower sector saw some definitive movements over the past year with several policy measures receiving cabinet approval. From the inclusion of large hydro into the renewable energy category to the revision of cross-border electricity trade guidelines, the government finally seems to be acknowledging the sector’s role in power generation and load balancing. However, some of these policies have not been formalised, and thus their benefits have not percolated to the relevant stakeholders. Meanwhile, private participation in the sector is at an all-time low. At the 17th Annual Conference on Hydro Power in India, Harvinder Manocha and Ashwin Kumar Patil discussed the recent developments, challenges and the role of private players in hydropower generation. Excerpts…

Where do you think the sector is heading from a private player’s perspective?

Harvinder Manocha, Chief Operating Officer, Hydro, GMR Energy

The government has introduced three key policy initiatives for the growth of the hydropower sector, including the change in status of large hydro from conventional to renewable power. This should help the segment improve its saleability. The key issue with hydropower has been its lack of competitiveness in the market vis-à-vis thermal, solar and wind power. The introduction of hydropower obligations (HPOs) has created a mandate for all states to purchase hydropower. The government is still working out detailed steps as to how these HPOs will vary by state. The same targets cannot be imposed on predominantly hydro states such as Uttarakhand and Himachal Pradesh and on the states with lower hydro potential. Another initiative that forms a part of the revised hydro policy is the hydro energy certificate (HEC) component, which is similar to renewable energy certificates (RECs) issued for solar and wind generation. That should improve the selling point, financing and viability of hydro projects. The policy change further involves sharing the infrastructure support for hydro projects, which has been a large roadblock for many projects, particularly in the north-eastern and the Himalayan regions. This would improve private sector participation in the hydropower sector. Many private projects in the Northeast, Jammu & Kashmir and Himachal Pradesh have not been able to achieve financial closure. Further, banks need to come out with a mechanism of how they can backload in terms of increasing the tenor of loans. At present, loan tenors are in the range of 12-15 years. These can be easily stretched to about 25 years, which can have a big impact on the tariff. These initiatives can lead to a levellised hydropower tariff of Rs 4.5-Rs 5 per kWh. Not much has happened with regard to the government’s engagement with bankers on this front. The sector needs some innovative financing instruments, particularly for the private sector.

Harvinder Manocha, Chief Operating Officer, Hydro, GMR Energy

Ashwin Kumar Patil, Head, Hydro, Tata Power

Since 1927, there has been no capacity addition in Tata’s hydro portfolio, except in 1997 when a 150 MW pumped storage unit was added. The Tata Group had carried out a study in the 1,960 MW Koyna hydropower plant on the Western Ghats, but it was later decided that the government would develop the plant instead of a private player. Since then, no new hydropower plant has been set up by the Tatas, mainly due to government policies. It is heartening to see the policy evolution, but in our view it is not sufficient. The policy does not talk about the interest rate, which is a major portion of project costs. Further, the treatment of hydropower in the merit order is a challenge. Recently, the new grid code was introduced, which has a provision that whenever lakes are overflowing, hydropower plants should be given preference in the merit order. However, this is only during an overflow, which may happen for just 10-15 days in a year. Therefore, we do not think the policy change will substantially help private players.

What is the status of your projects? Do you think the inclusion of large hydro into renewables will provide access to low-cost finance?

Ashwin Kumar Patil, Head, Hydro, Tata Power

 Harvinder Manocha

Over the past few years, GMR has been the only private sector company that has pushed for hydropower projects. Our 200 MW Bajoli Holi project is into the final stages of completion and should be commissioned in the latter half of this year. The interest rate for this project is as high as 14 per cent. A hydropower project getting financed at such high interest rates with a tenor of only about 15 years has much better options available for refinancing to improve its viability and competitiveness. The intent of the policy is to provide better access to low-cost finance for setting up hydropower projects. The state governments also need to come out with policy initiatives focused on reducing the tariff. Once the tariff is competitive, lenders will feel encouraged and incentivised to introduce better financing instruments. For example, Himachal Pradesh has taken the initiative of deferring the 12 per cent free power for 28 years. Other states should follow suit. In addition, the cross-border policy has been revised. The Upper Karnali has been a pioneer project and after struggling for almost four years on all regulatory fronts with the governments of India, Bangladesh and Nepal, the three-way PPA for the Upper Karnali project is in the final stages now. We expect the PPA to be signed in about three months. This will enable the financial closure of the 900 MW project in about one year. The tariff for the project is likely to be in a competitive range of Rs 5 per kWh. Of the 900 MW, 500 MW has been allocated to Bangladesh via India. Of the remaining, about 108 MW goes free to the Government of Nepal. We are also planning to sell 200 MW to one of the states in India and the rest is planned to be sold through open access.

What is your opinion on the pumped storage power plant and battery storage market?

Harvinder Manocha

I think the cost of solar plus storage will reduce in due course of time. This translates into a greater need to optimise hydropower generation costs. The government is putting the onus of hydropower development on central public sector units (CPSUs). This is evident from the direct allocation of 25 GW of projects by the Himachal Pradesh government to CPSUs. This is also partly due to the lack of initiative by the private sector, which does not have financing instruments that can make the tariff competitive.

Ashwin Kumar Patil

The capacity of pumped storage plants in India stands at 4,500 MW, but half of this storage is not working because of misplaced policies, unavailability of cheap power and other technical issues. The reason why pumped storage capacity is not growing is the lack of differential tariffs. We are currently considering pumped storage as an asset of the generator. Typically, the generator sets up the pumped storage plant, but the main beneficiary is the distributor. So if the plant generates 100 MUs, 75 MUs go to the generator. Whatever is generated beyond this, the generator gets only 20 paise per unit as per the CERC norms, which is very low. Therefore, no one wants to install pumped storage plants as they cost 20-30 per cent more than conventional hydropower plants. In other countries, differential tariffs are applicable for pumped storage projects. When 175 GW of renewable capacity is added into the system, most of which is solar and hence not available after 5 p.m., there will be high grid instability. This is when pumped storage, which is an asset of the generator, will be required to stabilise the grid. By this logic, it should be an asset of the grid. So, if the grid pays for its own stability, pumped storage costs will perhaps reduce and the generator and distributor will no longer be burdened. The present cost of battery storage is around Rs 30 per kWh and it is likely to reduce to Rs 4-Rs 5 per kWh in the next few years.

How do the costs and tariffs of your international projects compare with those in India?

Harvinder Manocha

There are some incentives for hydropower projects in Nepal such as lower taxes for electromechanical equipment. However, the labour and transportation costs are higher. So, the overall cost will be higher in Nepal as compared to India.

Ashwin Kumar Patil

For our 447 MW power plant in Mumbai, the tariff stands at around Rs 2.26 per kWh. For the plant in Georgia, for which we have signed a second PPA, the tariff stands at $0.055 per kWh or about Rs 3.5 per kWh.

What are the challenges for hydropower projects on the transmission side?

Harvinder Manocha

The Bajoli Holi project is now nearing commissioning, but we are still struggling with evacuation, which is under the purview of the state government. The challenge further extends to the policy aspect of transmission. The plant load factor of even the best hydro projects is around 50 per cent due to their inherent design, but the transmission charges are calculated for the full capacity. There is a strong need to optimise transmission charges for hydro projects. For solar and wind projects, many of the intra-state and interstate transmission charges have been waived, but no such provisions are extended to hydro projects. In a developed state like Himachal Pradesh, evacuation infrastructure for domestic projects should have been in place much before the projects were commissioned. It becomes even more critical for cross-border projects. The cross-border evacuation facility for the Upper Karnali and Arun III projects should be taken up on priority.

What are the three things that the government should do to improve the hydropower sector?

Harvinder Manocha

A mechanism that incentivises all private sector projects should be put in place to encourage participation. The policy initiatives should be announced without any further delay. The HPO targets should also be designated along with differential peak tariffs for hydropower projects to enable better financing terms.

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